A Wasted Crisis

In Canada, we seem to have weathered the financial crisis better than many, partly because of years of financial sacrifice by Canadians to regain fiscal sovereignty and partly because of continuing hunger for our natural resources. But in the almost-aftermath of the crisis we, like other developed countries, are now faced with exceptionally tough policy choices, choices about the kind of country and world we want for our kids and theirs. And in coming to grips with these choices we can expect and are beginning to see ever louder voices making the case for smaller government and reductions in social and health services. Why? Because, the argument goes, our level of indebtedness, including structural debt, demands a new round of austerity. The debate seems not so much about whether less government is the solution but rather about how fast and how deep to cut.

Think of the irony. The crisis was created, at least in part, by the doomed marriage between one partner, greed, in a financial economy that had become divorced from the real economy which produces goods and services of value, and the other partner, governments committed to privatization and deregulation to allow free markets to find their “perfect efficiency”. Greed and free market ideology. The consequences – huge bail outs, stimulus spending and soaring debt. In Canada, our debt to GDP is lower than many because of past fiscal policy and higher than it should be because of unwise tax cuts. Our revenues are down because we are poorer and our taxes are too low and, to add to the mix, our productivity is lagging. And revenues will decline further as the demographic crunch plays out and our dependency ratio (non-workers to workers) gets bleak at the same time as costs of the aging population soar.

In any case, what solutions will be proposed? Fundamental reform? Regulations to constrain greed and deal with the enormous human costs of so-called externalities such as enduring damage to the environment? Greater clout for our regulators? Stronger government presence to harness the economy for the well-being of the many? Higher taxes on financial institutions to anticipate the costs of future meltdowns and on consumption, pollution, and the very rich to balance the budget and address the challenges of climate change and the aging population?

No. The crisis was pretty much wasted for those who believe that government has a positive role to play and who have a larger view of what is entailed in correcting the market. But the crisis and our response continue to serve quite well the cause of those who pursue ever less government and more free market. The ideological approach that contributed to creating the conditions for crisis is gaining strength. Go figure.

Virtually all governments did focus, as they had to, on containing the damage. But rather than big changes the crisis might have called for and enabled, governments preferred to get the markets back to where they were with the least change possible. And now it seems pretty clear that we will be told, with an increasing sense of urgency, that we can no longer afford the size of government we built, that we cannot afford the current level of health and social services, and that we cannot afford major investments in our future, in education, innovation and green technology. The crisis, it seems, has passed, and we are back to business as usual, as it was in the 80s and 90s. Time for ordinary citizens and particularly the poorest to make sacrifices and future generations to pay the biggest price.

Or perhaps not exactly back to where we were. Governments’ capacity as stewards of the environment and the social commons will have been weakened, leading to greater inequality, more privatization of services once thought essential, and, quite possibly, more preventable crises. But we are seeing, here and there at least, a growing sense of unfairness, most often expressed as a desire to punish those at fault but which just might turn into more vociferous demands for some real change.

Surely it’s time now for a tough and thoroughgoing national debate. Jeffrey Simpson does a great job of setting out the choices, all of which are likely to have a role. And let’s repel the ongoing assault on government and public goods and, instead, figure out what needs to be done to make our institutions work better for us, for the future. And then let’s raise taxes.

One Response to “A Wasted Crisis”
  1. joeblow says:

    Alex Himelfarb’s message, that that the present financial crisis represents a significant missed opportunity to rethink the society we want and reaffirm the role of government, is crucially important when we think about what to do about our present budget deficit. But it is equally important when seen within the context of what to do about possible future government stimulus packages and investments that may be needed (an issue far off the radar screen for the media but not so for economists).

    Today, there appears to two areas of thought with regard to the implications of the financial crisis. One area of thought has it that a globally coordinated and deficit-funded stimulus was required to address the deflationary pressures created by the crisis but that now that recovery is imminent and continued growth foreseeable, deficit cutting is the order of the day. On this model, the right and the left can debate over whether we should cut programs or raise taxes but neither challenges the need to get the deficit “under control” before inflationary pressures take hold.

    By contrast, the second area of thought (Paul Krugman is perhaps a key representative) says that the deflationary pressures created by the crisis are still with us, and that the increases in jobs and economic activity that we are witnessing are essentially the effects of our own stimulus. Once the stimulus runs out, we could find ourselves back to where we started if we are not careful, with the prospect of sluggish economic growth for the foreseeable future, just like the decade of the 1930s, after the financial crisis of 1929. On this view, the crisis isn’t a one-shot deal and then a return to economic normalcy and anti-inflation firefighting, but the beginning of a long hard road forward, with likely further stimulus packages, unusually high deficits, continued deflationary pressures, i.e., a new normal.

    If reality conforms to the second model (even if the impact is felt less in Canada because of the revenues from the Tar Sands and the strength of our Banking system) nothing could be more important than the national debate about choices and the role of government that Mr. Himelfarb recommends. The ideologues may soon find themselves again in the absurd position of advocating their “private good, public bad” philosophy at a time when government is needed more than ever. There may still be time yet not to waste this crisis.

    Joe Blow

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